Market Cop | An Agency Handcuffed

In Cox Years at the SEC, Policies Undercut Enforcement Efforts

The five enforcement officials caught a morning Acela train bound for Washington. Based at the New York office of the Securities and Exchange Commission, the team was seeking agency approval to impose tens of millions of dollars in fines on a drug company, Biovail, which had allegedly used the crash of a truck hauling depression medicine to cover up financial losses.

But when the group arrived at SEC headquarters on that winter day early last year, it was barred from the room where the commission was meeting, according to a person familiar with the case. Chairman Christopher Cox and his colleagues reviewed the case inside. When the doors opened, the enforcement officials learned the commission had knocked down the penalty to a small fraction of what they had sought.

The outcome, though discouraging to the team, was not a complete surprise, sources said. After Cox became SEC chairman in mid-2005, he adopted practices that undermined the enforcement division's efforts to investigate cases of corporate wrongdoing and punish those involved, according to interviews with 19 current and former SEC officials.

During Cox's tenure, investigators who wanted to subpoena documents or compel interviews faced an increasingly cumbersome process to win the commission's approval for each case, according to current and former agency officials.

Cox also required enforcement officials to see the commissioners before approaching a company about a civil settlement. In several high-profile cases, when SEC lawyers were ready to ask the commission to authorize lawsuits or approve settlements, Cox postponed the decisions at the last minute, leaving cases unresolved for months, the sources said. At times, as in the Biovail case, the commission eventually weakened the sanctions sought by the enforcement division.

This is the legacy Mary Schapiro inherited when she replaced Cox as chairman this year. Among her first acts, Schapiro freed enforcement officials from getting commission approval before negotiating settlements with companies and established an accelerated process for authorizing subpoenas and depositions. She speaks frequently of taking the "handcuffs" off of the enforcement division.

This effort is central to Schapiro's strategy for rebuilding the SEC and ensuring it has a dominant voice in the emerging debate on overhauling the nation's regulatory system. Since the 1930s, the agency has been the top cop on Wall Street and the primary regulator of financial markets, requiring that firms play fair and give investors honest, timely information.

But a backlog of financial crime cases continues to slow the enforcement division as Schapiro tries to turn more of the agency's attention to abuses linked to the financial crisis, SEC officials said. The agency is still working to reinvigorate its dispirited enforcement ranks.

As grounds for the policies he adopted, Cox cited efficiency and ensuring that commissioners had the chance to review cases. Cox said in a recent interview that he had taken steps that made clear that "corporate penalties are an important part of the agency's enforcement arsenal."

But former enforcement lawyers said the practices had a chilling effect. Several cases, they said, were scaled back or dropped because of anticipated resistance from the commission.

"The presentation of cases is the culmination of the investigative process. When that process is interrupted, delayed or denied, it can't help but have a negative impact on the people who conduct those investigations," said James T. Coffman, a former assistant director of the enforcement division. "Clearly some people wonder, 'If they don't want these kinds of cases, why should I bother doing them even though they're very important?' "

Most former and current SEC officials spoke on condition of anonymity because they were discussing confidential legal matters or were not authorized by the agency to comment. But in a report last month, the Government Accountability Office, after interviewing many enforcement lawyers, concluded that the SEC penalty policies in 2006 and 2007 "led to less vigorous pursuit of corporate penalties, may have made penalties less punitive in nature and could have compromised the quality of settlements."